"Europe needs to retaliate with tax-based countermeasures"
In a series of comments, KfW Chief Economist Dirk Schumacher has urged the European Union (EU) to take a strategic and pragmatic approach to countering China's industrial policy. Schumacher's suggestions aim to protect sectors with high value-added and maintain protective measures where necessary, while avoiding escalating trade conflicts unnecessarily.
Schumacher has highlighted the need for the EU to focus on industries where Europe can maintain technological and economic leadership. He advocates for the use of selective protective measures rather than broad tariffs or blanket protectionism. This approach is intended to safeguard European industrial competitiveness in the face of high competitive pressure from China, characterised by low production costs, large-scale domestic market scaling, and Chinese government subsidies.
One of Schumacher's key proposals is for the EU to counter China's industrial policy with targeted tariffs on sectors with high value-added, such as the automotive industry, machinery, specialty chemicals, optics, and pharmaceuticals in Germany.
Schumacher also believes that Europe needs more sovereignty in the military and digital services sectors, and addressing this dependence is achievable, though it will take time. He suggests that Europe should share its know-how with Chinese companies in exchange for limited market access in key industries. However, he warns that the wind energy sector could be the next to collapse if Europe does not change its China policy.
In addition, Schumacher has emphasised the importance of more venture capital for innovative companies as a key to higher productivity. He also proposes easing the skilled labor immigration strategy, allowing employers to hire candidates without state-checked qualifications if they deem them suitable for the job.
Schumacher is optimistic that Germany will return to a sustainable growth path if the government implements the necessary reforms. He believes that improving infrastructure in Germany could enable many to work full-time, even if they currently cannot.
The KfW Chief Economist also believes that Europe is underestimating the challenges posed by China's industrial policy and advocates for progress in defense projects, the single market, and the capital market union to strengthen Europe. He emphasises that Europe has much to offer as a location.
In conclusion, Schumacher's suggestions for the EU's approach to China's industrial policy emphasise the need for a strategic, pragmatic, and selective approach that safeguards critical and innovative industries, avoids unnecessary escalation in trade disputes, and maintains Europe's strategic autonomy.
[1] Source: Handelsblatt, Reuters, and Der Spiegel [3] Source: Handelsblatt, Reuters, and Der Spiegel [5] Source: Handelsblatt, Reuters, and Der Spiegel
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